ARTICLE ANALYSIS: DEFICIT-FINANCED TAX CUTS AND INTEREST RATES
This research analyzes the article "Deficit-Financed Tax Cuts and Interest Rates" (Leduc, 2004). The article concerns (a) the fiscal policy of the current Bush Administration in relation to providing large tax cuts that are financed by increases in the federal budget deficit and (b) the monetary policy of maintaining low interest rates in the face of increases in the federal budget. The focus of the analysis presented in this paper is on the fiscal policy aspects of the article. In turn, the analysis focuses further on (a) the effects of the fiscal policy on gross domestic product (GDP) and (b) the effects of changes in GDP on the Ford Motor Company.
The Bush Administration and the Republican-controlled Congress enacted massive tax cuts in the absence of effecting any meaningful expenditure reductions. In fact, federal spending increased substantially in many budget areas. The Bush Administration defended these policies with the same rationale employed by the earlier Reagan Administration ù tax cuts will stimulate economic growth and, in turn, economic growth will increase absolute tax revenues to the point that a budget imbalance will not occur. The reasoning proved to be flawed in the Reagan Administration which generated budget deficits that exceeded the combined budget deficits of all preceding federal administrations in the United States. The reasoning also proved to be flawed in the current Bush Administration which rapidly moved the fiscal policy of the United States from budget balance to massive budget deficits.
Macroeconomic theory posits (assuming that other elements of fiscal policy and monetary policy do not change) a reduction in the net tax rate leads to an increase in the marginal propensity to consume. The following equation illustrates this point.
? = (1 û tâ)a > a = (1 û t)a, where
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